The myth of the Independent Research defence
Best Practice Advice & Compliance

The myth of the Independent Research defence

November 21, 2011
by Tony Vidler. Financial advisers safely relying upon third party (independent) research to defend product recommendations is a myth.  Many currently believe that through the simple act of out-sourcing product research, and then relying upon the research houses rating of a product, is in itself a recommendation of suitability for clients.
Product research houses themselves go to great pains to point out to advisers that suitability is not usually assessed.  Product structure and relative merits compared to its peers are assessed though.There is a side issue of course as to whether even that is credible research given the conflicted fee-charging methodology of many research houses.  However, let’s put that aside for the moment and assume that all research conducted on financial products is unbiased, utterly independent, and thoroughly academic.  (yeah, right).
So the financial adviser pays his monthly subscription to the research house, checks the product rating/recommendation status, then proceeds to recommend it to clients. In the event of product non-performance, or claims of negligent advice in the future, the adviser points to the research claiming “but I got it checked out by experts, and they said….”
And there is the myth.
Totalreliance on third party research to support product recommendations is dangerous ground.  Factoring in that research in product assessment is absolutely worthwhile, and adds to the defense of suitability.  So it is extremely useful as ONE aspect of product selection suitability, but you cannot fully “outsource” product recommendation responsibility safely.There have been a couple of cases in Australia that are very pertinent for NZ advisers.  Google and read up on them: “Delmenico v Brannelly & Anor” is one.  The Financial Ombudsman Service’s Determination 18959 is another (with a link to the full finding below).   FOS 18959 is particularly revealing over a number of advice issues.
The key paragraph (for this discussion) is para 148 on page 40 – “The adviser must go beyond this to demonstrate care and detailed understanding of the product before he can assume it suitable for a particular client”.  The background in brief is the adviser defended the product selected on the basis that it was suitable as it was on his business’ approved product list, and that products going on that list had been independently researched.
The conclusion that was reached by the Ombudsman was that this reasoning alone did not satisfy obligations to a particular client. The adviser had to go beyond this to demonstrate care and a detailed understanding of the product before he could assume it suitable.
Conclusion: a favourable rating on a product from a research house (while good) is not enough to rely on as an advisers defence  for client suitability.  Total reliance upon that rating or research is a myth.
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